Subsea 7 SA, an offshore oil services provider, advanced in Oslo as investors bought back into the stock after a bigger-than-expected provision in Brazil triggered the worst slump in more than four years.
The shares rose as much as 3.4 percent, the biggest intraday gain in almost five months, and traded 1.2 percent higher at 107.3 kroner as of 3:10 p.m. in the Norwegian capital. The stock fell as much as 18 percent yesterday, the most since Oct. 16, 2008, after the London-based company announced a bigger-than-expected provision for the Guara-Lula project off Brazil and on speculation that more losses may come.
“Although there’s no assurance against further hits on the project, it only represents 5 percent of backlog and the majority of the offshore scope is expected to be completed this year,” Pareto Securities AS analyst Kristian Diesen said in a note. “Some $1 billion of the enterprise value was wiped” off Subsea 7 yesterday, and with the current pipeline of contracts for the second half and a “highly attractive valuation,” the broker advises investors to buy the shares.
Guara-Lula had delays during the second quarter because of problems with the supply chain, bad weather and a delayed start in pipeline fabrication, largely because of customs-clearance issues, it said in a statement on June 26. Project costs are expected to increase by $250 million to $300 million compared with previous estimates, the company said.
The share price decline yesterday was an overreaction, Goldman Sachs Group Inc. said in a note today. “We expect a strong earnings rebound in 2014, driven by record backlog and margin improvement in Brazil and West Africa,” it said. The investment bank upgraded its rating on Subsea 7 to buy from neutral, and added the stock to its conviction buy list.
The cost overruns at Guara-Lula are tied to one isolated project and “we expect the stock to re-rate upon completion of the project’s high-risk phase,” Danske Markets said in a note. “We would buy the stock today.”
With established fields maturing and new finds becoming more difficult to develop, Subsea 7 has benefited from rising demand for the subsea engineering services it offers. The group operates projects around the world for companies including Statoil ASA, Petroleo Brasileiro SA and BP Plc.
Shares in Subsea 7 have declined 4 percent during the last 12 months, giving the company a market value of 37.8 billion kroner ($6.3 billion).